Electricity Authority sees risk to competition in some hedge contracts

The Electricity Authority has acknowledged there are potential issues with some hedging contracts. Photo / Bevan Conley

The Electricity Authority (EA) has acknowledged a potential risk to retail electricity competition in the pricing of “super-peak” hedge contracts.

The EA said a review of risk management options for power retailers found that while there are a range and combination of solutions available to retailers, there was a potential risk to retail competition.

The review was set up to look at whether the availability and pricing of risk management contracts was creating a barrier to retail competition.

“It found that retailers have been able to secure substantial hedge cover through over-the-counter [OTC] contracts offered by generator-retailers, and prices for most of these contracts were likely to be competitive,” EA chief executive Sarah Gillies said.

“However, we could not reach the same finding for super-peak hedge contracts, which provide morning and evening price cover when residential demand is highest and wholesale electricity prices can get very high.”

Risk management helps enable competition in the retail electricity market, especially for those retailers focused on domestic consumers and small business customers.

“The market for this type of hedge contract is neither deep nor liquid, with some gentailers [generator-retailers] not offering hedges when requested,” she said.

“While alternatives are emerging, that will take time.

“To support retail competition, we need to increase the liquidity of this type of contract and increase price transparency.”

Retail competition brings benefits to consumers and small businesses through more choice and access to affordable electricity, the EA said.

“At the same time, we are ensuring that we don’t stifle the long-term development of new risk management options, and the broader evolution of the sector.”

Risk management helps to insure retailers and major industrial users against wholesale electricity price volatility.

There is no one solution and retailers use a portfolio of complementary options to manage risk, the EA said.

“But for the next few years at least, the hedge contracts offered by the four big gentailers will continue to play an important role,” Gillies said.

Independent retailer Octopus Energy said the EA’s review identified risks to retail competition.

“While this finding is encouraging, it is noted that gentailer retail pricing and margin squeeze analysis were not undertaken – a full picture of retail competition requires this,” Octopus’ chief operating officer Margaret Cooney said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.